What should you do with your tax refund?

Taxpayers are usually tempted to spend a refund right away. But, impulse buying doesn’t set people up for financial success. Instead, things like debt, investments, and savings should all be thought about beforehand. 

Below we’ve outlined the things that a tax refund should be used for to ensure you are getting the most out of it.

1. High-Interest Debt

It’s no secret that high-interest loans and credit card debt put a strain on finances. High-interest rates can make it impossible to pay off the original balance, as they will be charged a fee on top of what is already owed, putting people in a never-ending debt cycle.

If you find yourself dumping money into a loan balance without any relief, money received from a tax return should instantly be put towards it, in turn, helping to lower monthly payments and preventing debt from growing.

2. Emergency Funds

An unexpected expense can have a long-lasting impact on a household. Things like medical bills, car repairs, or emergency home maintenance needs are all common things that have the potential to set people back for years to come.

That’s why setting aside part of a tax refund (or all of it) in a savings account can create a cushion to fall back on when unexpected bills come up.

3. Education Savings

For those with children, investing a tax return in a 529 college savings plan is one of the smartest ways to spend a refund, because a 529 college savings plan grows tax-free over time. Meaning, even a small amount of money saved in this account can easily grow into a substantial amount for their future.

4. Prepay Expenses

Bills that occur monthly, like rent, insurance premiums, or utility fees, could be prepaid with a refund. Prepaying things that you know you will need to pay anyway alleviates stress by not having to work it into your monthly budget.

5. Consider Home Improvements

If you’ve been putting off home repair projects, using a tax return to finally get them done is the perfect solution, because certain types of home repairs can get you a tax break or subsidy. Things like energy-efficient appliances and solar panels qualify for rebates on your next year’s taxes. Just be sure to verify that the rebate is available to claim where you live and that the type of work you are doing qualifies.

6. Invest in Your Retirement

Retirement planning is usually one of the last things people think about when they receive a tax return. But, contributing even a portion of a return to an account like an IRA or a 401(k) can grow it significantly over time. So, taxpayers should take advantage of the compound interest that’s earned on these contributions and consider making one with their return money.

7. Small Splurges

If you are mindful of your financial situation and don’t blow an entire refund on unnecessary items, a portion of this money should be used on something fun for yourself. Getting something can encourage you to keep saving since it will be viewed as a treat for all the hard work put in throughout the year. Spending on something small also prevents burnout and helps limit impulse purchases that you might regret.

When used strategically, a refund can be so much more than extra cash. It is an opportunity to strengthen your finances, put away savings, and invest in yourself long-term.

If you’re expecting a refund this tax season, call us at 407-328-5001 and we can see how your refund is best spent.

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